8/13/2007 @ 12:00PM

World's Cheapest Car

India is famous for national treasures such as the Taj Mahal, Mahatma Gandhi and, more recently, phone-based tech support. As the country enters its seventh decade of existence, there will soon be a new addition to the list–the world’s cheapest car.

With a minimally saturated domestic market and an escalating per-capita income, India is an automaker’s paradise. Only eight Indians out of every thousand own a car, compared with about 750 per thousand in the U.S. Per-capita income is up 8.4% over last year, an improvement over that year’s 7.4% gain over the year before. Hero Honda, the world’s largest two-wheel-vehicle maker, estimates that 30 million to 40 million people join India’s middle class annually.

Tata Motors
, India’s largest four-wheel automaker, is planning to capitalize on all this spreading wealth by releasing the Rs One Lakh. Its sticker price of about $2,500 would make it the world’s cheapest car.

“The potential for that car to sell in large numbers is huge,” says Manishi Raychaudhuri, a UBS analyst. “In India, the penetration of four-wheelers is very low. So naturally there’s some status attached to having a real car–it’s kind of a showpiece.”

Currently, Tata is India’s largest bus and truck maker and the second-largest heavy bus maker in the world. But its 15% share of the Indian passenger car market pales in comparison with that of Maruti Udyog, the
Suzuki
-partnered company with a 55% stake. A successful launch of the Rs One Lakh could break Maruti’s stranglehold.

And because of its low price and icon status, Tata’s new model should also swipe customers from Hero Honda and other two- and three-wheel manufacturers like Bajaj Auto and TVS Motor. A pricey two-wheeler costs about 50,000 rupees–half the price of the Rs One Lakh–but buyers are usually limited to three-year loans, says Raychaudhuri, who expects longer loans to be available for the world’s cheapest car.

Tata’s initial production capacity will be 100,000 units per year. The company is two or three years from completing a factory capable of churning out 250,000 of the cars per annum, according to spokesman Debassis Ray.

Tata currently earns about 17% of its revenue from exports. Still, the company plans to sell the Rs One Lakh only in India at first. Tata may eventually roll out the model in other developing nations, but it has no North American ambitions, unlike rivals in China like the Chery, which recently signed a deal with Chrysler to market its cars in the U.S.

“We have no immediate plans to come to the United States,” says Ray. “We think U.S. is a difficult market. It’s saturated and highly developed.”

Over the past three years Tata’s annual sales have risen by an average of 32%. Since 2004, when Tata became the first Indian engineering company to be listed on the New York Stock Exchange, the company’s stock is up 75%. In the wake of this success, reports have surfaced suggesting that Tata is mulling a bid for Ford’s Jaguar and Land Rover brands. But like all Indian carmakers, Tata is still restricted by the pace of highway construction in India, painfully slow in comparison to neighboring China’s frenetic rate.

“We still have a ways to go before we can call India the Detroit of the East,” says Raychaudhuri. “But if you compare the broader economies of India and China, China is growing at only a slightly more rapid pace. When India finishes its highway system, things will definitely improve.”